December 09, 2015

Martin Wolf insists on covering up for the bank regulators by blaming the bankers for the credits to Greece.

Sir, on December 9, you republished an article Martin Wolf wrote in January “Greek debt and a default of statesmanship”, and on which I have already commented.

Though I agree with most of its conclusions I must firmly repeat my objection to one of its arguments. Especially since by appearing again it seems to imply no repentance by Mr. Wolf.

Wolf writes: “[A] proposition is that the Greeks borrowed the money and so are duty bound to pay it back, how ever much it costs them. This was very much the attitude that sustained debtors’ prisons. The truth, however, is that creditors have a moral responsibility to lend wisely. If they fail to do due diligence on their borrowers, they deserve what is going to happen. In the case of Greece, the scale of the external deficits, in particular, were obvious. So, too, was the way the Greek state was run”

And with that Wolf shamefully turns a blind eye to that it was the bank regulators who, with their shamefully insignificant capital requirements for banks when lending to Greece, created a temptation extremely hard to resist for bankers who all compete in terms of the return on equity they can produce for their shareholders… and in terms of the bonuses they can receive for themselves.

For instance, if a banker wanted to lend to a Greek SME it could only leverage its equity and the support it received from society about 12 to 1. But if the bank lent instead to the Greek government, then it could leverage 60 times to 1 and more. In such circumstances what banker could explain to his board that it was better to lend to unrated Greek SMEs than to the Greek government… and especially when Greece was rated A at the time it was awarded all the big credits?

@PerKurowski ©